CEE Regional Overview
BMI View: The differing economic predicaments of the countries in the Central and Eastern Europe (CEE) region has resulted in a divergence of power consumption patterns, with some clear out- and under- performers. Although Russia maintains its spot as the regional powerhouse, thanks to the vast size of its market, we believe Turkey's power sector is emerging as a key area for growth. Although we expect to see a pronounced expansion in renewables across a number of countries in the region, thermal sources will remain the dominant fuel for power generation over our ten-year forecast period.
Consumption Patterns Varied
CEE power consumption during 2013 is set to grow by just over 2%, up slightly from our estimates for 2012, as a number of countries in the region show some signs of economic recovery. The longer term outlook also appears more optimistic, as we expect annual average growth in consumption to be 2.6% between 2013 and 2022. However, there are still clear variations in our consumption forecasts across the region, highlighting the differing macroeconomic and demographic fundamentals at play at the country-specific level.
|Consumption Under- And Out- Performers|
|Electricity Consumption Growth (% y-o-y), By Country, 2013-2022|
The divergence in economic outlooks remains highly dependent on the individual country's exposure to the eurozone.
As highlighted in previous analysis, the Turkish economy is not completely out of the woods yet. This notwithstanding, when compared to other power markets in CEE , Turkey emerges as the clear outperformer as long-term macroeconomic and demographic fundamentals support a positive outlook for power consumption. We expect an annual average consumption growth of 6.4% between 2013 and 2022.
We also expect power consumption in Kazakhstan to b e pronounced as the country's economic prospects are boosted by its vast natural resource wealth (primarily oil, gas, coal, iron ore and other base metals). Additionally, the energy-intensive mining industry will no doubt help to drive electricity demand.
The recovery in Central European countries ( Czech Republic , Hungary and Slovakia ) will be based largely on an improvement in the outlook for the eurozone, in particular in Germany, the bloc's economic powerhouse. Although, we expect to see slight recoveries in their economies (except Slovakia) during 2013, the eurozone crisis continues to negatively affect consumption levels and we expect this trend to continue until a sustained recovery is achieved.
Limited population growth and increasing energy efficiency measures across the r egion limits power consumption , resulting in CEE power demand to be less pronounced then in some other emerging markets, chiefly Latin America and Asia.
Russia Maintains Top Spot
We expect installed capacity in the region to be nearly 487GW in 2013, and we anticipate this to reach roughly 609GW by 2022, as we have priced in steady and relatively strong growth rates.
When examining the region by country, it becomes eviden t that Russia's power sector retains the largest share , and we expect this trend to continue across our ten-year forecast period (2013-2022); contributing around 4 5 % to the total by 2022. Russia's substantial existing capacity gives the country an advantage and we believe that the majority of the developments in the Russian power industry will be large-scale thermal and nuclear projects - especially considering that the Russian government aims to expand nuclear energy by increasing output by 50% by 2020. Furthermore , large international companies continue to be attracted to the country's power market, evidenced by the signing of a memorandum of understanding (MoU) between US-based General Electric (GE) and Russia's Sakhalin provincial government to develop power generation projects in the region, in March 2013.
|Regional Capacity Mix, % By Country, 2013-2022|
Despite Russia's prominent position in the regional capacity mix, we expect Turkey's power industry to emerge as a key player during the coming decade, expanding rapidly due to strong power demand and increased investment into the sector. Capacity expansion plans are a priority for the country; however, a lack of clarity with regards to the future electricity mix could jeopardise the government's efforts. That said, our outlook for the Turkish power sector is optimistic, particularly compared with its regional peers. As such, we expect Turkey to contribute roughly 17% to the total regional capacity by 2022, an increase from 13% in 2013.
Preference For Thermal
We expect thermal energy (namely coal and gas) to continue to play a pivotal role in the CEE, despite the ambitious emissions and renewable energy targets set by most of the countries in region over the previous decade. A number of countries in the CEE have large reserves of coal and gas, and are therefore keen to exploit their natural resources before spending on costly imports. The cost effectiveness of coal-fired plants is another driving factor and the project pipeline for these types of projects has grown in strength in recent months.
A push for coal-fired generation has been most prominent in Turkey. Following Turkey's landmark deal with the United Arab Emirates (UAE) regarding the development of generating capacity on the Afsin Elbistan lignite field in January 2013, a Saudi company has now applied to build a coal-fired power station in the Central Anatolian province of Konya's Karapnar district.
However, with a number of energy policies in the region shifting their focus towards renewables and gas electricity generation, the financial viability of coal projects is likely to decrease slightly over the coming decade. Pressure from the EU is also presenting some barriers to the excessive use of coal-based electricity generation, in particular for Poland. It was announced on March 7 2013 that the EU's second highest court, the General Court in Luxembourg, rejected Poland's challenges to the European Commission about the allocation of free carbon permits for energy-intensive industries. The Commission plans to withdraw some of the excess permits available to industries, thus limiting the ability of companies to emit carbon dioxide through industrial processes without incurring monetary charges.
|Regional Generation Mix, TWh, 2013-2022|
Nuclear Outlook Precarious
The outlook for nuclear energy in the region looks quite weak, as projects are finding it increasingly difficult to secure financing, while public opposition to nuclear energy remains reasonably strong following the Fukushima crisis. That said, in a refer endum held in Bulgaria in January 2013, 61% of voters backed the construction of a nuclear power plant in the count ry. We believe that frustration with the current government, national pride and considerations relating to the country's export potential were key in shaping the result. Other than Bulgaria, the project pipeline remains limited across the region, with Russia and Turkey the principal countries pursuing the development of nuclear technology.
Renewables On The Up
Despite the under-developed nature of the CEE's non-hydro renewables sector, particularly when compared to its western European counterparts, we forecast high levels of growth across the renewables segments, particularly for wind power, and maintain our view that the sector presents real opportunities for renewable energy developers. Western European developers, who continue to face challenging headwinds in their domestic, core markets, are increasingly seeking out opportunities within the CEE, most notably in Turkey, Poland and Romania's wind markets. In fact, in February 2013, Bloomberg reported that E.ON plan to develop at least 100MW of wind power plants in Romania by the end of 2014, but that this could reach up to 300MW of installed capacity.
|Opportunities In Renewables|
|Regional Capacity Mix, %, 2013 and 2022|
A key factor underpinning this projected renewables expansion and boosting the investment prospects in the region is the implementation of government subsidy programmes, in particular Feed-in Tariffs (FiTs). Using our FiT database, we have identified five countries in the region that offer a tariff programme (Bulgaria, Czech Republic, Turkey, Ukraine and Hungary).
That said, there are still a number of risks that face the renewables industry, most pertinently the financial insecurity surrounding renewable energy projects (driven by austerity measures, cost considerations and a lack of credit flows), as well as the regulatory uncertainty underpinning many government's energy agendas.